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Distributor or Commercial Agent – Do it Right

Dr. Michael Krämer

Author: Dr. Michael Krämer
Senior Lawyer.

Guiding Principle
Companies should be diligent when organizing their distribution channels in the UAE. This article aims to point readers into the right direction in order to enable them to do it properly and avoid certain pitfalls.

A. Introduction
Arranging and maintaining a suitable sales channel is key to any commercial entity operating in the UAE and throughout the Gulf. Yet, this is an area where things can go quite wrong right from the start, which can, and should, be avoided. This is how:

B. Distribution Arrangement vs. Commercial Agent
Under normal circumstances a (foreign) manufacturer would look for a distribution partner once such manufacturer intends to venture into a new market. The parties would then agree on the terms of such distribution arrangement, which are likely to include order terms, minimum sales targets, termination provisions, etc. The parties are usually free to agree on any terms they deem suitable.

The situation in the UAE is slightly different. Art. 3 of UAE Federal Law No. 18 of 1981 (“Commercial Agencies Law”) states that “Trade agency activities are not permitted to be practiced inside the state except by […] commercial agents […].” While there is some room to interpret this clause in various ways, this clause is commonly understood to state that all distribution activities throughout the UAE have to be done through “commercial agents”.

Not every person qualifies as such “commercial agent”, but only UAE nationals or commercial entities fully owned by UAE nationals (Art. 2 Commercial Agencies Law). Apart from restrictions on the choice of distribution partner, the Commercial Agencies Law mandates further restrictions, the most significant of which is Art. 8, according to which commercial agencies can only be de-registered/terminated if both parties agree, thus rendering commercial agencies virtually interminable in practice. The appointed agent has regularly no interest in the agency being terminated, unless and until the agent receives a usually fairly generous “severance payout”.

If the appointment of an agent cannot be terminated, however, a foreign manufacturer can put on the agent very little pressure. This is often a problem in practice, particularly if the agent does not perform as has been contractually agreed. Usually in such situations, threatening the other party with contract termination motivates the party in breach to live up to its contractual obligations. A party who is immune from termination, however, often feels to do (or not do) whatever it pleases. To make matters worse, the foreign manufacturer cannot simply use another agent, because the agent becomes the manufacturer’s exclusive sales channel by law.

However, as so often in the UAE, there is quite a large gap between mandatory legal requirements and factual reality. In economic reality, probably most foreign manufacturers do not appoint a commercial agent and have organized their distribution activities in the UAE similar to the way these activities are organized in most other countries around the globe. This raises the question when a distributor should be appointed and when it is required to appoint a commercial agent.

1. Using a Distributor
Although, strictly legally speaking, working with a distributor (many of which are foreign owned and would not qualify for agency registration) does not comply with the requirements of the Commercial Agencies Law, doing so has to be described as the more common form of distribution arrangement in the UAE. It is also tolerated by the UAE authorities in a sense that we are not aware of any action having been taken against distributors, which would restrict them in their commercial activities.

Given the above mentioned flexibility in agreeing on the precise terms of the distribution arrangement, appointing / working with a distributor should be the preferred option for most manufacturers wanting to sell their products in the UAE.

2. Appointing a Commercial Agent
There are instances where it is difficult to avoid appointing a commercial agent, however. The most relevant example in practice is the participation in public tenders. When issuing public tenders many UAE authorities will not entertain bids from parties who did not appoint a commercial agent. Hence, such manufacturers whose products are geared towards the public sector, such as manufacturers of hospital or school equipment, for example, have no choice other than to appoint an agent if they want to participate in such tenders.

C. Doing it Right
Even in instances where appointing an agent cannot be avoided there is room to limit the effects of this registration.

When appointing an agent, the parties are required to clearly specify (amongst other things) the territory for which the agent is appointed (and thus, becomes the sole distribution channel), as well as the products for which the agent will be responsible.

It is generally not a good idea for a manufacturer to appoint the agent for the whole UAE territory and in respect of all of such manufacturer’s products. This is neither required, nor advisable. Instead, the agent should only be appointed for the Emirate in which the authority requiring a registered agent is based. If, for example, the only authority asking to see an agency registration is based in Abu Dhabi, there is absolutely no reason to extend the agent’s registration to the Emirate of Dubai as well.

A similarly restrictive approach should be taken when specifying the product(s) that will be the subject of the agency. There is absolutely no reason to appoint the agent for “all” of the manufacturer’s products. In fact, the agent should be appointed only for those products without which the tender bid would not be accepted and not more.
Even for those products that inevitably have to be included in the registration, being specific really helps. The product offerings tend to change over time, so why not specify “Model ST-100” as subject of the registration, knowing that “Model ST-100” will be replaced by “Model ST-200” next year? In our experience, authorities tend to check only IF an agency has been registered, not also for WHAT. Hence, once all products for which the agency has been registered have been replaced by their successors, the commercial agency remains registered, but its scope is reduced to nil.

D. Conclusion
The best way of distributing products throughout the UAE is by appointing a qualified distributor. Appointing a commercial agent who then enjoys the numerous protections afforded to agents by the Commercial Agencies Law, should be avoided wherever and whenever possible. Where appointing an agent cannot be avoided, the appointment as such should be handled smartly in a way that limits the manufacturer’s exposure to the protections of the Commercial Agencies Law. Commercial agents who know that they cannot be terminated are difficult to control. Commercial agents who have been appointed in respect of only a limited number of products can effectively be controlled, because they will want to distribute also those products in respect of which they have NOT been appointed as agents. In an environment where the agent’s position is heavily protected by law, this is a way for the manufacturer to level the playing field.

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